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Investor Sentiment and the Pricing of Characteristics-Based Factors

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  • Zhuo Chen
  • Bibo Liu
  • Huijun Wang
  • Zhengwei Wang
  • Jianfeng Yu

Abstract

Previous research has revealed that return spreads between stocks with high and low characteristics-based factor beta remain insignificant. This study investigates the time variation in the pricing of various characteristics-based factors, uncovering a notable two-regime pattern: high-beta portfolios yield higher returns than low-beta portfolios after high-sentiment periods, while the opposite occurs after low-sentiment periods. Remarkably, this two-regime pattern is completely reversed for macro factors. Mutual fund and hedge fund returns corroborate these findings. Our results suggest that exposure to characteristics-based factors likely represents mispricing levels, particularly during high-sentiment periods, whereas exposure to macro factors likely represents risk, particularly during low-sentiment periods.

Suggested Citation

  • Zhuo Chen & Bibo Liu & Huijun Wang & Zhengwei Wang & Jianfeng Yu, 2025. "Investor Sentiment and the Pricing of Characteristics-Based Factors," The Review of Financial Studies, Society for Financial Studies, vol. 38(12), pages 3580-3625.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:12:p:3580-3625.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf053
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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